Corporate governance The new strategic imperativegraphics.eiu.com/files/ad_pdfs/KPMG_final.pdfWhere does corporate governance rate in your list of current priorities? % of respondents

A white paper from the Economist Intelligence Unit

sponsored by KPMG International

Corporate governance The new strategic imperative

Corporate governance: The new strategic imperative was written by the

Economist Intelligence Unit and sponsored by KPMG International.

The Economist Intelligence Unit bears sole responsibility for the

content of the report. The Economist Intelligence Unit’s editorial team

conducted the interviews and online survey and wrote the report.

Victor Smart was the main author. The findings and views expressed in

this report do not necessarily reflect the views of KPMG International,

which has sponsored this publication in the interests of promoting

informed debate.

The research effort for this report comprised a number of key initiatives:

• The Economist Intelligence Unit conducted a special online

survey to test the attitudes of senior executives worldwide to corporate

governance. One hundred and fifteen international executives

participated in the survey, which was conducted in June-July 2002; full

survey results are available in an appendix to this report.

• A series of in-depth interviews were held with leading corporate

and regulatory figures in July and August 2002. Executives at over 30

different institutions worldwide were interviewed from a diverse range

of countries and industries.

• The Economist Intelligence Unit also undertook substantial desk

research into corporate governance and transparency practices

worldwide. The research effort was co-ordinated by Anthony Ray.

Our deepest thanks go to all the interviewees and survey respondents

for sharing their insights on the topic.

© The Economist Intelligence Unit Limited 2002 1

Executive summaryNearly a year after the Enron

revelations first surfaced, corporate

governance dominates the political and

business agenda. After a slew of

scandals, most of them centred in the

US, politicians and regulators,

executives and shareholders are all

preaching the governance gospel.

But has the pendulum swung too

far? This white paper from the

Economist Intelligence Unit reveals

concern among executives that hasty

regulation and overly strict internal

procedures may impair their ability to

run their business effectively. CEOs

have to bear in mind the potential

trade-off between polishing the

corporate reputation and delivering

growth—for all the headlines on

corporate responsibility, are investors

prepared consistently to sacrifice

earnings for the sake of ethics?

Four main conclusions emerge from

this white paper:

• Regulations are only one part

of the answer to improved governance.

Corporate governance is about how

companies are directed and controlled.

The balance sheet is an output of

manifold structural and strategic

decisions across the entire company,

from stock options to risk management

structures, from the composition of

the board of directors to the

decentralisation of decision-making

powers. As a result, the prime

responsibility for good governance

must lie within the company rather

than outside it.

• Designing and implementing

corporate governance structures are

important, but instilling the right

culture is essential. Senior managers

need to set the agenda in this area, not

least in ensuring that board members

feel free to engage in open and

meaningful debate. Not all board

members need to be finance or risk

experts, however. The primary task for

the board is to understand and approve

Corporate

governance The new strategic

imperative

2 © The Economist Intelligence Unit Limited 2002

Ten ways for a CEO to improve corporate governance

1. Schedule regular meetings of the non-executive board members from which you and theother executives are excluded. Non-executives are there to exercise “constructive dissatisfaction”

with the management team. They need to discuss collectively and frankly their views about the

performance of the executives, the strategic direction of the company and worries about areas where

they feel inadequately briefed.

2. Explain fully how discretion has been exercised in compiling the earnings and profitfigures. These are not as cut and dried as many would imagine. Assets such as brands are intangible

and with financial practices such as leasing common, a lot of subtle judgments must be made about

what goes on or off the balance sheet. Don’t hide these, but use disclosure to win trust.

3. Initiate a risk-appetite review among non-executives. At the root of most company failures

are ill-judged management decisions on risk. Non-executives need not be risk experts. But it is

paramount that they understand what the company’s appetite for risk is—and accept, or reject, any

radical shifts.

4. Check that non-executive directors are independent. Weed out members of the controlling

family or former employees who still have links to people in the company. Also raise awareness of

“soft” conflicts. Are there payments or privileges such as consultancy contracts, payments to

favourite charities or sponsorship of arts events that impair non-executives’ ability to rock the boat?

5. Audit non-executives’ performance and that of the board. The attendance record of non-

executives needs to be discussed and an appraisal made of the range of specialist skills. The board

should discuss annually how well it has performed.

6. Broaden and deepen disclosure on corporate websites and in annual reports. Websites should

have a corporate governance section containing information such as procedures for getting a motion

into a proxy ballot. The level of detail should ideally include the attendance record of non-executives

at board meetings. If you have global aspirations, an English-language version must be available.

7. Lead by example, reining in a company culture that excuses cheating. Don’t indulge in sharp

practice yourself—others will take this as a green light for them to follow suit. If the company culture

has been compromised, or if you are in an industry where loose practices on booking revenues and

expenditure are sometimes tolerated, take a few high-profile decisions that signal change.

8. Find a place for the grey and cautious employee alongside the youthful and visionary one.Hiring thrusting MBAs will skew the culture towards an aggressive, individualist outlook. Balance this

with some wiser, if duller heads—people who have seen booms and busts before, value probity and

are not in so much of a hurry.

9. Make compensation committees independent. Corporate bosses should be prevented from

selling shares in their firms while they head them. Share options should be expensed in established

companies—cash-starved start-ups may need to be more flexible.

10. Don’t avoid risk. No doubt corporate governance would be a lot simpler if companies were

totally risk averse. But in the words of Helmut Maucher, honorary chairman of Nestlé, “You have to

accept risks. Those who avoid them are taking the biggest risk of all.”


both the risk appetite of a particular

company at any particular stage in its

evolution and the processes that are in

place to monitor risk.

• There is an inherent tension

between innovation and conservatism,

governance and growth. Asked to

evaluate the impact of strict corporate

governance policies on their business,

45% of the executives surveyed by the

Economist Intelligence Unit for this

report thought that M&A deals would

be negatively affected because of the

lengthening of due-diligence

procedures, and 36% thought the

ability to take swift and effective

decisions would be compromised.

State-of-the-art corporate governance

can bring benefits to companies, to be

sure, but also introduces impediments

to growth.

• Transparency about a company’s

governance policies is critical. As long

as investors and shareholders are given

clear and accessible information about

these policies, the market can be

allowed to do the rest, assigning an

appropriate risk premium to companies

that have too few independent directors

or an overly aggressive compensation

policy, or cutting the costs of capital for

companies that adhere to conservative

accounting policies. Too few companies

are genuinely transparent, however,

and this is an area where most

organisations can and should do

much more.

IntroductionNearly a year after the Enron

revelations first surfaced, corporate

governance dominates the political and

business agenda. After a slew of

scandals, most of them centred in the

US, politicians and regulators,

executives and shareholders are all

preaching the governance gospel.

US lawmakers have reacted most

vigorously, passing a tough new

corporate reform bill that establishes

an oversight board for auditors of

public companies and criminalises

securities fraud. Many non-US firms

find themselves bound by the new law,

and jitters about corporate fraud have

affected financial markets worldwide—

government reviews into governance

are under way in the UK, Germany, the

European Commission and elsewhere.

Within companies, a bout of intense

self-scrutiny is in train. Robert Miller,

chairman and CEO of Bethlehem Steel

and a director of four other public

companies, remarks, “Ever since Enron

imploded, every board I’m on has

asked, ‘What lessons can we learn and

what should we do differently?’” In a

new Economist Intelligence Unit

survey of senior executives worldwide,

46% of respondents say that corporate

governance is one of their

organisation’s top three current

priorities—and for 14%, it is the

top priority.


No one disputes the need for

transparency, honesty and accuracy

on the part of corporations. But has

the pendulum swung too far? This

white paper from the Economist

Intelligence Unit reveals concern

among executives that hasty

regulation and overly strict internal

procedures may impair their ability to

run their business effectively. One

investment analyst comments that

“working on the something-must-be-

done principle, the temptation for

regulators is to come up with a new,

stricter set of rules that won’t be

understood and indeed may even

obfuscate things and fail to

win respect.”

Meanwhile, CEOs have to bear in

mind the potential trade-off between

polishing the corporate reputation and

delivering growth—after all, despite

the headlines on corporate

responsibility, are investors really

prepared consistently to sacrifice

earnings for the sake of ethics?

Respondents to the EIU survey were

asked which factors posed the greatest

threat to their share price. The

greatest dangers were market risk

(39%), a shortage of top-quality

management (37%), reputational risk

(32%) and a failure to innovate

(29%)—poor financial results and

disclosure did not figure in the top

four threats.

Source: Economist Intelligence Unit online survey, July 2002.

Agenda topperWhere does corporate governance rate in your list of current priorities? % of respondents

0 5 10 15 20 25 30 35

Other

It's important but not a managementpriority

It's among our top ten priorities

It's one of the top three priorities

It's the top priority 14

32

29

22

3

The blunt instrument of regulation

Today’s corporate turbulence may

seem unprecedented, but we’ve been

here before. In his book “The Great

Crash 1929”, J K Galbraith chronicled

how an asset bubble breeds lax

accountability. The bubble’s collapse

exposes malfeasance as money gets

tight. This creates loss of investor

confidence and public outrage, which

in turn prompts a hasty reaction by

lawmakers and regulators. The worry

for today’s executives is that the 2002

version of this cycle will result in

inappropriately far-reaching rules.

After all, despite the welter of

American scandals, it’s worth restating

that corporate governance works

satisfactorily in thousands of firms. Or,

as veteran investment banker Derek

Higgs, the non-executive director of

Allied Irish Banks, who is leading an

official review into the role of Britain’s

non-executive directors, remarks, “I

don’t think that in the UK or even,

perverse as it may sound, in the US,

things are actually so badly wrong.”

More to the point, regulation

remains a very blunt instrument to

tackle a hugely complex area. According

to Mr Higgs, “The first thing in this

game is that there are no absolutes.

There are no blacks and whites. There is

no such thing as getting it right—there

are only behaviours that tend to

improve the outcomes.”


Defining terms

Corporate governance is about promoting corporate fairness, transparency and

accountability. Yet a precise definition of what is a relatively new-ish concept

remains blurred. Some take a narrow view, seeing “governance” as a fancy term

for the way in which directors and auditors handle their responsibilities towards

shareholders. Others expand the concept to explain a firm’s relationship to society,

often blurring the distinction between corporate governance and corporate social

responsibility.

Few, however, will cavil at the following 1999 definition from the OECD:

Corporate governance is the system by which business corporations are directed and

controlled. The corporate governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as the board,

managers, shareholders and other stakeholders, and spells out the rules and procedures

for making decisions on corporate affairs. By doing this, it also provides the structure

through which the company objectives are set, and the means of attaining those

objectives and monitoring performance.

Indeed, some argue that it is no

coincidence that today’s corporate

scandals have been centred in a country

with a very legalistic culture. Peter

Forstmoser, chairman of Swiss Re, one

of the world’s largest reinsurers, and a

veteran of the corporate governance

scene, comments, “In America in

particular there is too much emphasis

on form. You hear stories about board

members attending meetings flanked by

their attorney and everyone having a

very tick-box mentality. If you have that

approach, you can’t have an open

discussion to find a solution to

problems.”

Alistair Johnston, who is managing

partner of global markets at KPMG

International, one of the Big Four

accountancy firms, remarks, “The

critical and over-riding question is ‘do

the financial statements fairly present

the company position in a way that is

clear and transparent to all

stakeholders?’ ”

Mr Johnston and others favour

the approach based on the guiding

principle of “truth-and-fairness” which

is used by the International

Accounting Standards Board. Says

Mr Johnston: “We need to empower

boards, the audit committee and the

accounting profession so that

whatever the detailed rules may say,

they can assert that substance matters

more than form.”

Just mandating greater disclosure

doesn’t necessarily help. Ted Awty, UK

head of assurance at KPMG, comments,

“One of the problems of transparency is

that disclosure soon becomes so

voluminous that it ceases to be

transparent. In the case of Enron, if

you read the accounts in sufficient

detail it is pretty much all there. But

what does it mean? Clarity and

openness are often in the minds of

regulators but they can be translated

by companies as sheer volume of

disclosure, which isn’t effective.”

Similarly, an understandable

desire on the part of regulators and

politicians to believe that accountancy

boasts a quasi-mathematical precision,

thereby justifying sending errant chief

executives to prison, risks seeming like

wishful thinking. An accurate appraisal

of corporate performance is a

surprisingly elusive goal. The reason for

this is not pilfering by executives, but

because there are genuinely different

views on assessing the value of assets

such as brands, goodwill, intellectual

capital, and the appropriate ways to

expense items such as bid costs (see

box, page 7).

Whereas in the past it was possible

for a CEO to say, “these are our assets

and these are our earnings”, nowadays

there is far more room for quite

legitimate discretion. It takes a non-

accountant, Paul Coombes, director of

McKinsey’s corporate governance

practice, to state baldly, “The notion


that there is one true figure that reveals

how companies perform is a myth.”

Culture countsIn any case, corporate governance

is about much, much more than the

accuracy of the balance sheet. Indeed,

except in cases of rudimentary fraud,

the balance sheet is just an output of

manifold structural and strategic

decisions across the entire company,

from stock options to risk management

structures, from the composition of the

board of directors to the decentralisation

of decision-making powers. To recall

the OECD definition—”corporate

governance is the system by which

business corporations are directed and

controlled”—the prime responsibility

for good governance must lie within

the company rather than outside it.

The EIU survey backs up this


Capita expenditure

In July, when the frenzy about misstatements of earnings was at its height, Capita, a

fast-growing FTSE-100 outsourcing firm in the UK, saw its share price hit badly by

rumours about accounting for bid costs in the sector. Analysts were alarmed that

hefty expenses were being capitalised by the industry rather than deducted in a

routine way.

Since Rod Aldridge, executive chairman, maintains that Capita is the FTSE’s most

transparent company, the response was to further “double disclosure”. At the time of

the half-year results, 100 analysts and fund managers were invited to a numbers-

heavy session in which executives laid bare how the firm had treated the numbers.

Journalists were given separate one-to-one briefings.

“We went though a lot of detail and it’s now a non-issue, as it always was,” says Mr

Aldridge. The simple fact is that Capita writes off bid costs on a monthly basis irre-

spective of whether it wins or loses. To avoid any gripes that there had been shenani-

gans when the company was carved up into five rather than four divisions, a full audit

trail was proffered. Mr Aldridge was also able to point out that, unlike its rivals,

Capita did not bid for vastly complex government-sector Private Finance Initiative

deals. Nor does the group have any off-balance-sheet special-purpose vehicles.

Where there was leeway in accounting for some items, Capita explained it had opted

for arch-conservatism. It had chosen to forgo manoeuvres that would have appeared

to have improved its bottom line, temporarily, by between £8m and £10m ($12m-

15m). Says Mr Aldridge: ”We are very open. Analysts and fund managers have ready

access to senior management—phone when you like.” Glasnost helped: the Capita

share price bounced up around 3 percentage points despite a falling market on the

day when it announced it would explain the fine detail of its accounts.

viewpoint. Asked to rank the most

significant barriers to improved

corporate governance, executives

selected cultural or managerial

hostility to whistleblowing (chosen by

51% of respondents as the most

significant or second most significant

barrier), followed by an increased focus

on the part of shareholders and

investors on operating cashflow

measures rather than earnings per

share (34%) and a lack of financial

understanding on the part of senior

executives and the board (30%).

Interestingly, cost was not perceived to

be an especially significant barrier. Of

the three top barriers, two relate

directly to individual company culture

and structure, and the effects of the

other can also be mitigated by good

internal governance.

Defining good governance precisely

is difficult, of course. In the Economist

Intelligence Unit survey, respondents

were asked to identify the main

remedies that would have helped

prevent the Enron debacle. The key

imperatives chosen were the following:

full disclosure of off-balance-sheet

transactions (57%), greater powers for

the audit committee (48%) and regular

rotation of external auditors (46%).

Yet mandatory rotation of external

auditors serves to reduce the


Whistle while you workPrincipal barriers to the implementation of proper corporate governance policies

within companies

% of respondents choosing as highest or second-highest barrier

Cultural and managerial hostility to whistleblowing on dubious practices 51

Increased focus from shareholders and investors on operating cashflow measures rather than earnings per share 34

Lack of financial understanding on the part of senior executives and the board 30

Lack of financial understanding on the part of line managers and middle managers 27

Lack of business understanding on the part of external auditors 26

Lack of business understanding on the part of the board 23

Technology constraints make it difficult to get a decent integrated picture of the financial accounts quickly 21

Cost of implementing and communicating corporate governance policies throughout the organisation 20


discretionary powers of audit

committees. Accountants also point

out that rotation weakens auditors’

understanding of the business.

What’s more, a key lesson from

the Enron experience, where the board

was an exemplar of best practice on

paper, is that governance structures

count for little if the culture isn’t right.

As Tom Tierney, a former managing

partner of Bain, a consultancy, has

explained, “Culture is what determines

how people behave when they are not

being watched.”

Graeme Musker, the company

secretary, describes how AstraZeneca, a

pharmaceuticals company, recently

conducted an exercise asking, could

what happened at Enron happen here?

“We came to the conclusion that these

are radically different companies with

different cultures.” Even so the

company made a few tweaks to its

processes (see box, page 10).

Instilling the right kind of corporate

culture is the stuff of management

bestsellers—there are no easy answers.

But self-evidently, CEOs need to lead by

example. Lawrence Weinbach, CEO of

Unisys, an IT services company, told a

recent meeting of leading American

chief executives: “Once you as CEO go

over the line, then people think it is

okay to go over the line themselves.”

As for the composition of the board,

members feel free to engage in what

has been described as a role of

“constructive dissatisfaction” by

facilitating regular meetings from which

executive directors absent themselves.

Top management must also grasp that

directors’ independence can be

compromised by “soft conflicts” such

as significant charitable contributions

to a favourite institution, the award of

consultancy contracts to associated

companies or the employment of board

members’ children.

As for the composition of the board,

members do not need to have

specialist finance or risk expertise to

play an effective governance role. The

task for the board is rather to

understand and approve both the risk

appetite of a particular company at

any particular stage in its evolution

and the processes for monitoring risk.

If the management team proposes

changing that radically—for example,

by dramatically gearing up the balance

sheet, by switching the portfolio of

assets from low to high risk, or by

engaging in off-balance-sheet

financial transactions that inherently

alter the volatility of the business

and its exposure to uncertainties—the

board should be quite willing to

exercise a veto. Where there is a

proposal for shifting the level of risk,

the board has the right to have the

rationale explained and the obligation

to reject the proposal if need be.



Better practice

Culture is necessary but not sufficient to ensure good corporate governance. Theright structures, policies and processes must also be in place. AstraZeneca, a pharmaceuticals company, made one or two tweaks following a recent review of itsgovernance practices, for instance. In future, outside auditors will not be awardedconsulting contracting work that they will subsequently have to audit. And any sub-stantial consultancy contract, of $500,000 or above, will have to be expresslyapproved by the audit committee. AstraZeneca is also going to demand the rotationof audit partners—either every five or seven years.

But if any institution, inside or outside the company, deserves scrutiny, it is the board of directors. According to the Economist Intelligence Unit survey, 44% of respondents say the board of directors has primary responsibility for corporate gov-ernance. Yet asked to assess the understanding that non-executive directors had oftheir business, 28% thought they possessed only a satisfactory understanding and14% thought their understanding was unsatisfactory or poor. More worrying still,when respondents were asked about the confidence they had in various institutionsto uncover financial irregularities, the board received the fewest votes of completeconfidence.

Up to scratch?What level of understanding of the business do non-executive board directors have?

% of respondents

An excellent understanding 12

A good understanding 44

A satisfactory understanding 28

An unsatisfactory understanding 10

A poor understanding 4

Other 2


Swiss Re is one company to have realised the value of the board. A decade or so ago,the board was sometimes viewed from inside the company as the “advance guard of theenemy—things were hidden from it”, according to Peter Forstmoser, current chairmanof the reinsurance giant. “We have witnessed a real change. Today we have sound strategy and good information flow with proper transparency within the company.”

And the board itself has come under closer scrutiny. As Mr Forstmoser explains, “Eventwo or three years ago not much attention was paid to the performance of non-execs.You selected good people and there were hardly any checks on performance. Nowevery year the board has a meeting dedicated to an assessment of how the boarditself has performed in the past 12 months.” A next step may be to devise a way tomonitor the performance of individual non-executive directors and to bring in out-siders to coach them where necessary.

The price of safetyJust below the surface of the debate

on how to improve corporate

governance, untouched by the media

and the politicians, flows a riptide of

controversy about the relationship

between innovation and conservatism,

governance and growth.

The optimist’s view is that

governance is not a burden to be

tolerated, but a positive force to help

businesses become and stay good.

Dominique Thienpont of the European

Commission’s financial markets unit

asserts that well-run companies with

sound governance “outperform their

indices”.

But others see a stark choice in the

wake of Enron between companies that

are accountable and those that are

agile. Writing in the context of the

debate about loose, innovative

companies versus tight, structured

firms, Bill Weinstein, professor at

Henley Management College, argues,

“We may now be caught with a real

dilemma—not a situation in which we

can waffle about ‘balance’ between

loose networks that deliver more than

their core competencies and

identifiable units with strict lines

of accountability.”

Respondents to the EIU survey break

into opposing camps. Asked to evaluate

the impact of strict corporate

governance policies on their business,

45% of the executives surveyed thought

that M&A deals would be negatively

affected because of the lengthening of

due-diligence procedures, and 38%

thought it would have a positive

impact. Thirty-six per cent thought the

ability to take swift and effective

decisions would be compromised,

against the 34% who thought decision-

making of this type would improve.

No doubt, corporate governance

would be made a lot simpler if

companies avoided risk altogether.

They could, for example, shy away from

“exotic” financial instruments and

transactions with unduly opaque

structures. But what counts as exotic in

this context lies very much in the eye of

the beholder. Forty years ago, a

national airline that leased rather than

owned its fleet would have looked odd.

Today’s investors may accept

securitisation but look askance at

companies that heavily exploit

instruments such as collateralised debt

obligations (which apportion debt

default risks in arcane ways).

Defining where the real boundaries

of acceptability lie is a formidable task

(though one possible test would be

whether the CEO can come up with a

plain man’s rather than sophist’s

explanation of what is being done and

can say, not that “we have an arguable

case in law”, but rather that in terms of

general business principles this is a

reasonable way of doing things). But it


is formidable precisely because

companies, and their shareholders,

have a legitimate interest in testing

those boundaries. “You have to accept

risks,” says Helmut Maucher, honorary

chairman of Nestlé. “Those who avoid

them are taking the biggest risk of all.”

The power of informationThe corporate governance debate is

a far more subtle one than the one

played out in the newspaper pages

might suggest. Tight governance can

protect firms and investors from fraud,

error and undue risk, but it can also

threaten agility and innovation. Yet

regulators, the media and the public

are uncomfortable with the notion that

accounting and governance are a

legitimate area of discretion. The

solution to the dilemma lies in

transparency about a company’s

governance policies.

As long as key players within the

company understand and approve

governance policies, and as long as

investors and shareholders are then

given clear and accessible information

about those policies, the market can be

allowed to do the rest, assigning an

appropriate risk premium to companies

that have too few independent directors

or an overly aggressive compensation

policy, or cutting the costs of capital for

companies that adhere to conservative

accounting policies.

That’s the theory. But research for

this white paper has found that leading

firms worldwide perform poorly when it

comes to transparency. The Economist

Intelligence Unit looked at the top ten


Mixed messageThe impact of strict corporate governance on business

% of respondents Negative No impact Positive

The ability to form new alliances and partnerships with outside entities 18 44 38

The ability to undertake innovative activities such as corporate venturing or spin-offs 25 40 33

The ability to find new and legitimate means of reducing financial risk 24 35 40

The length of due-diligence procedures during M&A transactions 45 18 38

The ability to take swift and effective decisions 36 29 34



Tracking transparency

The Economist Intelligence Unit looked at the top ten firms by market capitalisation

in the US, UK, Japan, France and Germany over a three-week period in July 2002.

Each company was assessed for the provision and accessibility of information on 29

different governance issues ranging from disclosure on executive pay, information

on non-executive directors, retention of auditors and ease of voting at the AGM.

Overall, most firms (two-thirds of the 50 reviewed) offer a separate and easy-to-find

section on corporate governance, except in Japan and the US, where such sections

were only available on half the websites reviewed. But if you want a record of how

often non-executive directors attended board meetings, most of these companies

(94%) wouldn’t tell you and only two shared the information without making you

hunt for over an hour.

Japanese and US companies were worse than their European counterparts at

disclosing governance information—at least on their English-language websites.

German companies were the best among the bunch. All ten German companies

examined made it easy to find out when the next annual general meeting was,

provided a separate section on their websites about how they govern their companies

and made it easy to discover when the last quarterly results were released.

Admittedly basic, but few other companies in other countries disclosed even this

much. German companies were also better than others at disclosing when the last

meetings with analysts were held, what risks the companies faced and what

accounting policies they followed.

Opacity rulesAverage corporate transparency scores in each country*

US UK Germany France Japan

Average score 0.5 1.1 1.3 1.2 0.4

* Ten companies in each country were marked for transparency on 29 items of governance

information, according to the following scale:

0 = information not there;

1 = information there but hidden;

2 = information easily found but hard to understand/incomplete;

3 = information easily found, understandable and complete.

Note: Full research results are available from the Economist Intelligence Unit on request. Please con-

tact Andrew Palmer on [email protected]

Source: The Economist Intelligence Unit.

firms by market capitalisation in the

US, UK, Japan, France and Germany,

and assessed the degree of openness

they displayed in making available

information on various corporate

governance issues.

The results were not encouraging.

Governance information—including CEO

searches, selecting their directors and

auditors, or shareholder voting rights—

is often either buried in or missing

from corporate websites and annual

reports (see box, page 13). Details of

accounting policy are in any case

inherently daunting for the layperson—

here perhaps lies the future for the

audit profession, with the role of the

auditors increasingly geared to making

the inner workings of the balance

sheet transparent.

Of course, even transparency

has its limits. Swiss Re’s chairman,

Mr Forstmoser, cheerfully admits that

he would not disclose the reserve set

aside for the multi-billion-dollar World

Trade Center claim, now subject of

litigation. And some would argue that

transparency puts the burden of

responsibility for identifying poor

governance practices back on the

investor rather than the company

itself. But after a decade when

investors were happy to get rich rather

than to question soaring stock values,

it doesn’t hurt to remember that the

shareholder has the ultimate

responsibility for the decision to

invest—and that corporate

transparency is crucial to enabling

an informed decision.

Executives have a clear

responsibility consciously to define and

implement corporate governance

policies that offer a decent level of

reassurance to employees and

investors. Thereafter, disclosure is the

most effective way for companies to

resolve the thorny tensions that do

exist between vision and prudence,

innovation and accountability.



Appendix: Executive survey results

As part of the research for this white paper, the Economist Intelligence Unit conducted

an online survey of 115 senior executives worldwide into their views on corporate

governance. We would like to thank everyone who participated in the survey for their

time and insights.

Location

Middle East/North Africa 4

Asia/Pacific 31

North America 26

Western Europe24

Latin America 7

Eastern Europe 5

Sub-Saharan Africa 2

Industry

Consumer markets 6

Financial services28

Information,communications and entertainment 23

Other25

Industrial markets17

Job title Other

6

Senior vice-president/Manager 42

Director24

CXO14

Analyst/Consultant8

Chairman/President

6

Respondent demographics% of respondents



Figure 1

Where does corporate governance rate in the list of current priorities within your organisation? % of respondents

0 5 10 15 20 25 30 35

Other

It's important but not a managementpriority

It's among our top ten priorities

It's one of the top three priorities

It's the top priority 14

32

29

22

4


Figure 2

Who has primary responsibility for corporate governance issues within your organisation? % of respondents

0 10 20 30 40 50

Other

No one has primary responsibility

The audit committee

A special corporate governance team

The investor relations department

The CFO

The CEO

The board of directors 44

25

11

1

8

4

5

3


Figure 3

How confident are you that the following type of incident could not happen at your firm? % of respondents

1 2 3 4 5

Complete No confidence

confidence at all

Enron 45 33 18 3 2

(ie systemic governance failures)

Allied Irish Banks 24 40 25 11 0

(ie exposure to actions of rogue employee)

Equitable Life 12 31 36 18 3

(ie exposure to unexpected market

or macroeconomic movements)

Merrill Lynch 28 28 25 13 5

(ie conflicts of interest between revenues

centres in the same company)

Withholding of sensitive information 21 37 19 22 1

from independent directors


Figure 4

Which of the following pose the greatest threat to the share price of your organisation?% of respondents

1 2 3 4 5 6 7 8 Most Least

threatening threatening

Unethical behaviour by employees 11 9 18 14 8 13 13 13

Credit risk 3 13 12 16 13 21 10 13

Market risk

(ie a downturn in market conditions) 19 20 20 10 15 10 4 3

Operational risk

(ie IT or logistics failures) 5 13 22 21 14 10 11 2

Reputational risk 15 7 13 20 13 11 4 7

A failure to innovate as fast

as competitors 13 16 14 18 13 10 10 7

Poor financial reporting and

disclosure practices, including

communications with analysts 8 15 10 14 14 12 19 8

A shortage of top-quality senior

management talent 15 22 26 9 5 8 9 4




Figure 7

In your view, what level of understanding of the business do non-executive board directors have? % of respondents

0 10 20 30 40 50

Other

A poor understanding

An unsatisfactory understanding

A satisfactory understanding

A good understanding

An excellent understanding 12

44

10

28

4

2


Figure 5

Does your firm have a code of ethics? % of respondents

0 20 40 60 80 100

No

Yes 81

19


Figure 6

Has it been revised in the past 12 months? % of respondents

0 10 20 30 40 50 60 70 80

No

Yes 37

63


Figure 8

What are the principal lessons other companies can learn from the collapse of Enron? % of respondents

0 10 20 30 40 50 60

Other

There should be full disclosure of off-balance-sheettransactions

Stock options should not form a substantial majorityof a senior executive's compensation

Companies should not purchase audit and non-audit servicesfrom the same provider

Companies need to rotate their external auditorson a regular basis

There should be a majority of independent directorson the board

Key advisory committees should be composedsolely of independent directors

The audit committee should be given greater powersto investigate financial reporting

The CEO should not also hold the position of chairman

The CEO should certify the accuracyof the accounts each year

38

38

48

21

20

46

19

39

7

57


Figure 9How many of these prescriptions does your organisation put into practice? % of respondents

0 10 20 30 40 50 60

Other

There is full disclosure of off-balance-sheet transactions

Stock options do not form a substantial majority ofsenior executives' compensation

The company does not purchase audit and non-auditservices from the same provider

The company rotates its external auditors on aregular basis

There is a majority of independent directors on the board

Key advisory committees are composed solelyof independent directors

The audit committee has been given greater powersto investigate financial reporting

The CEO does not also hold the position of chairman

The CEO certifies the accuracy of the accounts each year 55

49

34

17

26

20

50

42

6

44


Figure 10

How much confidence do you have in the following to uncover irregularities in financial reporting within your organisation? % of respondents

1 2 3 4 5


confidence at all

Senior management 26 37 24 11 3

The board of directors 16 33 23 19 8

The CFO 33 37 17 12 1

The audit committee 16 39 25 12 4

External auditors 18 42 29 11 0

Internal auditors 19 38 29 10 0


Figure 11

How much confidence do you have in the following to rectify irregularities in financialreporting within the organisation if they are uncovered? % of respondents

1 2 3 4 5


confidence at all

Senior management 41 40 13 6 1

The board of directors 33 40 20 6 1

The CFO 42 31 18 8 0

The audit committee 25 34 23 13 1

External auditors 22 33 27 14 4

Internal auditors 19 31 26 13 5



Figure 12

What are the principal barriers to the implementation of proper corporate governancepolicies within companies?

1 2 3 4 5 6 7 8 Most Least

significant significant

Technology constraints make it difficult to

get a decent integrated picture of the

financial accounts quickly 13 8 18 15 8 12 12 15

Lack of financial understanding on the

part of senior executives and the board 9 21 23 17 13 5 7 5

Lack of financial understanding on the

part of line managers and middle managers 5 22 17 24 19 8 1 4

Lack of business understanding on the

part of the board 10 13 16 16 15 13 10 7

Lack of business understanding on the

part of external auditors 4 22 19 15 1 12 8 5

Cost of implementing and communicating

corporate governance policies throughout

the organisation 7 13 11 17 13 14 15 11

Increased focus from shareholders and

investors on operating cashflow measures

rather than earnings per share 20 14 13 15 9 11 10 5

Cultural and managerial hostility to

whistleblowing on dubious practices 19 32 8 12 7 6 5 8



Figure 13

What potential impact does the imposition of strict corporate governance procedures haveon the following aspects of business? % of respondents

1 2 3 4 5

Substantially No Substantially

negative impact impact positive impact

The ability to form new alliances and

partnerships with outside entities 4 14 44 26 12

The ability to undertake innovative activities

such as corporate venturing or spin-offs 4 21 40 20 13

The ability to find new and legitimate

means of reducing financial risk 2 22 35 25 15

The length of due-diligence procedures

during M&A transactions 10 35 18 26 12

The ability to take swift and

effective decisions 7 29 29 19 15



Figure 14

Which of the following measures does most in your view to ensure corporate transparency for shareholders? % of respondents

1 2 3 4 5 6 7 8 9Most Least

impact impact

Global adoption of International Accounting

Standards in financial reporting 25 26 19 9 9 4 4 4 2

Mandating listed companies to adopt and

publish corporate governance guidelines

and a code of business conduct and ethics 16 18 17 15 15 4 7 4 4

Requirement for the reporting of results to

uniform accounting guidelines before any

reference to pro forma or adjusted information 19 23 23 9 10 6 4 5 1

Quicker disclosure of insider-trading by

company officers 20 20 20 12 12 5 4 2 4

Requirement that reasons for and impact

of accounting policies be included

in annual reports 16 16 22 19 15 5 3 3 2

CEO to certify all statements and reporting

of accounts to shareholders 22 13 13 14 17 6 5 7 2

Requirement for the inclusion of an Operating

and Financial Review in the annual report 19 19 19 18 8 5 7 1 1

Use of scenarios and probabilistic forecasts

in forward-looking financial statements 6 11 21 12 15 10 12 6 4

Financial results to be discussed at press

conference with media and analysts

together in the audience 10 12 14 11 18 5 10 8 10



Figure 15

How many of these measures does your company implement?% of respondents

0 10 20 30 40 50 60 70 80

Other

Financial results are discussed at press conferencewith media and analysts together in the audience

Scenarios and probabilistic forecasts are used inforward-looking financial statements

An Operating and Financial Review is includedin the annual report

CEO certifies all statements and reporting ofaccounts to shareholders

Reasons for and impact of accounting policiesare discussed in the annual report

Details of insider-trading by company officersare published faster than required by rulebook

Results are reported to uniform accounting guidelinesbefore any reference to pro forma or adjusted information

Corporate governance guidelines and a code of businessconduct and ethics are in place and published

International Accounting Standards are usedin financial reporting

49

62

52

15

35

52

16

54

7

23


Figure 16

Which Fortune 500 company stands out in your view as a leader in the field of corporate governance and transparency?% of respondents

0 5 10 15 20 25

General Motors

ExxonMobil

Coca-Cola

ABB

BP

Microsoft

Wal-Mart

Berkshire Hathaway

IBM

Shell

GE

None24

18

6

5

5

4

4

4

2

2

2

2

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Documents

Corporate governance The new strategic imperativegraphics.eiu.com/files/ad_pdfs/KPMG_final.pdfWhere does corporate governance rate in your list of current priorities? % of respondents